Suppose the interest rate on your car loan is 15.00 percent and the inflation rate is 14.00 percent. Calculate the real interest rate.

Real Interest rate= 1%

Explanation:

Real interest rate is an adjusted  rate of interest  in which the effects of inflation has been removed. For an investor, real interest rate can  allow for real yield of fund  and for the borrower,  the real cost of the fund after the maturity dates.  Also, depending on the  volatility ( variations ) in inflation  real interest rate also can  pose  a risk or certainty  to both parties.

Using the Fisher equation,

Real Interest rate = Nominal interest rate - the actual inflation rate.

= 15.00 % - 14.00%

= 1%

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